Sunday, August 8, 2010

This lecture was delivered on March 25, 2009, at Union Theological Seminary in a public forum, "Christianity and the U.S. Crisis," associated with a class co-taught by Cornel West, Serene Jones, and Gary Dorrien. It is an abridged version of a chapter in Dorrien's forthcoming book, Social Justice in Question: Economy, Difference, Empire, and Progressive Christianity (Columbia University Press, 2010).

Today we are caught in a global economic crash and depression, a calamity affecting every nation connected to the global economy, especially poor nations lacking economic reserves. But this crisis also puts into play new possibilities for a democratic surge, perhaps toward economic democracy.

From the perspective of Economics 101, every bubble mania is basically alike, but from the beginning, this one has been harder to swallow, because it started with people who were just trying to buy a house of their own, who usually had no concept of predatory lending, and who had no say in the securitization boondoggle that spliced up various components of risk to trade them separately. It seemed a blessing to get a low-rate mortgage. It was a mystery how the banks did it, but this was their business; we trusted they knew what they were doing. Our banks resold the mortgages to aggregators who bunched them up with thousands of other subprime mortgages, chopped the package into pieces and sold them as corporate bonds to parties looking for extra yield. Our mortgage payments paid for the interest on the bonds.

For twenty years securitizations and derivatives were great at concocting extra yield and allowing the banks to hide their debt. Broadly speaking, a derivative is any contract that derives its value from another underlying asset. More narrowly and pertinently, it's an instrument that allows investors to speculate on the future price of something without having to buy it. The words that are used for this business-securitization, insurance, diversifying risk-sound reassuring, but they mask that the business is pure high-leveraged speculation and gambling. Credit-default swaps are private contracts in a completely unregulated market that allow investors to bet on whether a borrower will default. Ten years ago that market was $150 billion; today it's $62 trillion, and it's at the heart of the meltdown. Credit default sellers are not required to set aside reserves to pay off claims, and in 2000 Congress exempted them from state gaming laws. AIG's derivatives unit was a huge casino, selling phantom insurance with hardly any backing, for which we now have to pay. The tally for the past six months: four bailouts, $160 billion, some very hard-to-take bonus payments, and no bottom in sight for a sinkhole of toxic debt exceeding $1 trillion.

Derivatives created dangerous incentives for false accounting and made it extremely difficult to ascertain a firm's true exposure. They generated huge amounts of leverage and were developed with virtually no consideration of their broad economic consequences.

So many plugged-in players rode this financial lunacy for all it was worth, caught in the terribly real pressure of the market to produce constant short-term gains. Speculators gamed the system and regulators looked the other way. Mortgage brokers sold bad mortgages; bond bundlers packaged the loans into securities; rating agencies gave inflated bond ratings to the loans; corporate executives put the bonds on their balance sheets; and all made fortunes off toxic products they had no business creating or passing off. The chief rating agencies, Moody's and Standard & Poor's, were supposed to expose financial risk. Instead, paid by the very issuers of the bonds they rated, they hung triple-A ratings on rubbish. There was so much money to be made that firms couldn't bear to leave it aside for competitors to grab. The banks got leveraged up to 50-to-1 (that's where Bear Stearns was at the end) and kept piling on debt. The mania for extra yield fed on itself, blowing away business ethics and common sense.

Today we are staring into an economic abyss, a global deflationary spiral. Deflation, once started, has a terrible tendency to feed on itself. Income falls in a recession, which makes debt harder to bear, which discourages investment, which depresses the economy further, which leads to more deflation. To have any chance of breaking the deflationary spiral, the Obama administration has to solve the bank problem and dispose of the toxic debt.

One option is Henry Paulson's original plan, "cash for trash," this time with more public accountability. Another is to ramp up the insurance approach, "ring-fencing" bad assets by providing federal guarantees against losses. But these are more-of-the-same options that coddle the banks and don't solve the valuation problem-that no one trusts anyone else's balance sheet. The banks are holding at least $2 trillion of toxic debt. For the past six months, the banking system has been paralyzed because the big private equity firms and hedge funds are refusing to pay more than thirty cents on the dollar for the mortgage bundles and the banks can't stay in business if they book such huge losses on their holdings. In the meantime the banks are holding out for at least sixty cents and pleading for more relief.

The Latest Bailout Fad: Creating Bad Banks

The third option, the "bad bank" model, creates transitional banks to soak up bad debt. Here the risk of getting prices wrong is even greater, assuming that assets are valued immediately. If the government overpays for toxic securities, taxpayers are cheated; if it doesn't overpay and the banks take mark-to-market prices, many are sure to fail. Some advocates of the bad bank strategy say the government could stall on the price issue, waiting until values rise, but FDIC chair Sheila Bair says no, banking is not alchemy: assets can't be floated into the ether.

Bair and Timothy Geithner have settled on an aggregator bank model that blends the original Paulson plan with some elements of the bad bank topped off with an auction scheme to find private buyers for the toxic debt. Geithner wants the government to create a $2 trillion public-private investment fund that subsidizes up to 95 percent of deals partnered with hedge funds and private equity firms to buy up the bad assets of the zombie banks. The private funds will end up owning the assets; the FDIC will do most of the partnering work; and the Treasury will hire four or five investment management firms.

Since this is apparently what we're going to do, I certainly hope it works. But this plan is by far the most cumbersome and least transparent strategy of all. It coddles the banks. It is based on the dubious hope of finding enough private buyers for rotten goods. It assumes that private fund managers have been wrong thus far about the real value of the mortgage bundles. It offers a taxpayer guarantee to investors to ensure they won't lose money if they get in. And it depends on convincing taxpayers to pony up another $2 trillion for that purpose. Essentially, this is a scheme to pay fantastic bribes to private investors to buy the bad assets for more than they're worth.

Here's A Better Idea: Let's Create Good Banks!

I am for biting the bullet now. It's obscene to keep paying off the very people who created this disaster. It's better to take control of the situation now than to dither for another nine or ten months while we lose 600,000 jobs per month. At some point moral fairness and accountability have to enter this picture. We should nationalize the zombie banks, transfer the bad assets to a reincarnation of the 1980s Resolution Trust Corporation, and sell off the sellable parts to new owners.

Nationalization is cleaner and more transparent than the alternatives. It takes hold of the valuation problem by finding the bottom. It cuts off the gusher of taxpayer gifts to managers and shareholders. It offers taxpayers a way of getting some of their money back. It puts an end to mergers between zombie banks, which create more zombie banks that are too big to fail.

Most importantly to me, an aggressive nationalization strategy would put into play the possibility of something more creative and constructive: establishing publicly funded venture capital banks. If we can seriously talk about creating bad banks or aggregator banks, we ought to be able to talk about creating publicly owned good banks to do good things. Public banks could finance start-ups in green technology that are currently languishing and provide financing for cooperatives spurned by traditional banks. The public banks could be financed by an economic stimulus package, or by claiming the good assets of banks seized by the government, or both.

We must push Obama for him to create anything like that, as he is surrounded by centrist corporate establishment types eager to placate Wall Street and averse to wiping out shareholders. We must also push him to stick to a social investment strategy throughout his presidency, instead of backing off from it as Franklin Roosevelt did.

A public bank that supported green technology and cooperatives would be a major breakthrough for economic democracy in this country. Economic democracy is about democratizing power and creating environmentally sustainable economies. In its full-orbed version, it features mixed forms of worker, community, and mutual fund or public bank enterprises. I am not suggesting that factors of production trump everything else. Any social justice politics worthy of the name requires a feminist, interracial, multicultural, ecological, and anti-imperial consciousness that privileges liberationist and environmental issues.

But no serious challenge to existing relations of power can ignore the factors of production. Economic justice is never dispensable. Those who control the terms, amounts, and direction of credit play a huge role in determining the kind of society that everybody else lives in. We're getting a dramatic demonstration of that today. The question of who controls the process of investment is enormously important. Gains toward social and economic democracy are needed today for the same reason that political democracy is necessary: to restrain the abuse of unequal power.

Pros and Cons of Economic Democracy

Economic democracy, like political democracy, is messy and time-consuming. Democratically controlled capital is less mobile than corporate capital, and the return to democratically controlled capital tends to be lower than in corporations, because worker-controlled enterprises are more committed to keeping low-return firms in operation. Producer cooperatives are often too slow, small, and humane to compete with corporations, and they require cooperative habits and values that cut against the grain of American individualism. In the United States, any strategy to break down concentrated economic power by expanding the cooperative sector confronts difficult trade-offs, political opposition, and cultural barriers.

But economic democracy also has pragmatic considerations in its favor. Economic losses caused by worker participation can be offset by gains in productivity made possible by it. People often work harder and more efficiently when they have a stake in the company. Worker ownership is a key option for communities threatened by runaway plants and deindustrialization. Experiments with various kinds of worker ownership increased dramatically in the 1990s, aided by a growing network of policy experts, and some unions began to bargain for worker ownership, worker control over pension funds, and worker management rights. These developments have the potential to become the building blocks of a serious movement for economic democracy.

Today there are approximately 12,000 worker-owned firms in the United States, including large enterprises such as Republic Engineered Steels, Publix Supermarkets, and Northwestern Steel and Wire. Most employee ownership plans offer shares without voting rights; most assure that employees will be kept in a minority ownership position; few provide educational opportunities to help worker/owners develop management skills; and virtually none offer programs to build solidarity or help worker/owners forge links with other cooperative enterprises or raise awareness of economic democracy issues. Worker ownership without democratic control is a nominal version of economic democracy, thwarting the real thing, and American unions have a generally dismal record in this area, reinforcing the shortcomings.

With all its limitations, however, worker ownership is a viable option, and a necessary one. The Mondragon network in Spain is spectacularly successful; in the United States, several thousand firms have converted to employee ownership, thousands of others have been launched with worker-ownership plans, and approximately 1,000 companies in the United States are fully worker-controlled.

It Begins by Building the Cooperative Sector

Full-orbed economic democracy is obviously far off. On the way to something like it, economic democracy is about building up institutions that do not belong wholly to the capitalist market or the state. It begins by expanding the cooperative sector. Producer cooperatives take labor out of the market by removing corporate shares from the stock market and maintaining local worker ownership. Community land trusts take land out of the market and place it under local democratic controls to serve the social needs of communities. Community finance corporations take democratic control over capital to finance cooperative firms, make investments in areas of social need, and fight the redlining policies of banks. These strategies widen the base of social and economic power by mixing together cooperative banks, employee stock ownership plans, producer cooperatives, community land trusts, and planning agencies that guide investments into locally defined areas of need such as housing, soft-energy hardware, infrastructure maintenance, and mass transit.

But merely expanding the cooperative sector is not enough. Cooperatives usually prohibit non-working shareholders, so they attract less outside financing than capitalist firms. They are committed to keeping low-return firms in operation, so they tend to stay in business even when they can't afford to pay competitive wages. They are committed to particular communities, so they are less mobile than corporate capital and labor. They smack of anti-capitalist bias, so they have trouble getting financing and advice from capitalist banks. They tend to maximize net income per worker rather than profits, so they tend to favor capital-intensive investments over job creation. And because cooperative owners often have their savings invested in a single enterprise, they tend to avoid risky innovations.

These problems can be mitigated with productivity-enhancing tax incentives and regulations. Cooperative economics and ecological sustainability are naturally linked by the necessity of creating structural alternatives to the capitalist fantasy of unlimited growth. The kind of economic development that favors the needs of poor and disenfranchised communities and does not harm the earth's environment requires a dramatically expanded cooperative sector consisting of worker-owned firms rooted in communities, committed to survival, and prepared to accept lower returns.

But worker ownership does not do enough for equality, especially in the highest-yielding cooperatives, which nearly always have high entry fees. Rather than allow members to sell out to the highest bidder and take their capital gains, most cooperatives require members to sell out to the company. This policy guards against reverting to traditional capitalist ownership, but in cooperatives with high share prices, one has to be rather well off or very determined to apply. One might address the equality problem by universalizing cooperation, but that would ruin a mostly good thing. If everyone had to belong to a cooperative, the entry fees would be waved and many enterprises would fail.

Better Social Ownership Models

We need forms of social ownership that facilitate democratic capital formation, have a greater capacity for scaling up, and are more entrepreneurial. Specifically, we need forms of economic democracy featuring public banks and mutual funded holding companies. This approach can take a variety of forms, but the essential idea is to establish competing banks or holding companies in which ownership of productive capital is vested. The companies lend capital to enterprises at market rates of interest and otherwise control the process of investment, including decision-making power to initiate new cooperatives and shut down unprofitable firms. Equity shareholders, the state, and/or other cooperatives own the holding companies or public banks.

Unfortunately there is a lot more theory on this subject than concrete examples of it. The theorists include Peter Abell, Raymond Plant, Alec Nove, Saul Estrin, David Miller, John Roemer, Robert Dahl, Joanne Barkan, Gar Alperovitz, Radoslav Selucky, Otto Sik, Thomas Weisskopf, and David Winter. The biggest experiment thus far was the Meidner Plan in Sweden, named after German economist Rudolf Meidner, which was enacted in 1982 by the Social Democratic government. It called for an annual 20 percent tax on major company profits to be paid in the form of stock to eight regional mutual funds. Worker, consumer, and government representatives controlled the funds, and as their proportion of stock ownership grew, these groups were collectively entitled to representation on company boards. If fully carried out, this experiment would have rendered effective control over profitable firms in Sweden to the worker and public organizations. But the Social Democrats made little effort to educate the public about it or win popular support for it. For eight years Sweden's corporate class railed against it constantly. The Meidner Plan's term expired in 1990, and especially after the Swedish banking crisis of 1992, the Social Democrats lost their enthusiasm for it. That made political sense for them at the outset of second-wave globalization. It may prove to be the death knell for large-scale experiments in full-orbed economic democracy.

But less ambitious forms of economic democracy have succeeded in many places, and the scale question rests on politics and culture more than economic viability. Public bank theory takes seriously the failures of state socialism, the limitations of worker ownership, and the necessity of building up highly capitalized forms of economic democracy. The distinct advantage of this approach is that it diversifies forms of risk sharing and promotes greater efficiency by forcing firms to be financially accountable to a broad range of investors. Essentially, it is a solution to the entrepreneurial deficiencies of worker ownership, addressing conflicts of interest between cooperative owners and profitability that cause cooperatives to miss market signals.

There Can Be No Socialist Blueprint or Magic Wand

This approach does not rest on idealistic notions about human nature and it should not be the next progressive blueprint. Economic democracy is a brake on human greed and domination; the whole point of it is to fight the universal propensity of dominant groups to hoard social goods and abuse disenfranchised people. Neither should progressives absolutize any particular model of economic democracy, for the blueprint mentality is inherently problematic. Socialists were wrong to equate socialization with nationalization. They were wrong to reject production for profit, wrong to think that state planners could replicate the complex pricing decisions of markets, and wrong in trying to organize an economy not linked by markets. Not all Socialist traditions made these mistakes, but the blueprint mentality was deeply ingrained in virtually all of them.

From a democratic perspective, the key problem with the mutual fund model is that it weakens workers' power at the firm level. To the extent that the holding companies are granted supervisory control over their client enterprises, worker control is diminished. To the extent that the holding companies are kept in a weak position, the advantages of the mutual fund model are traded off as the enterprises essentially become cooperatives.

I have a theory about how to deal with that problem-it's a circular scheme modeled on Mondragon's "second degree" cooperatives that upholds the authority of the holding companies-but more important than any particular theory or model is the willingness to expand the social market in different ways and find out which models work best in particular circumstances. The tradition of Christian social ethics and progressive theology to which I belong has an ample history on this subject. The father of the social gospel, Washington Gladden, believed that profit-sharing industrial partnerships would put an end to the class struggle, until he lived long enough to see otherwise. The founder of social ethics, Francis G. Peabody, shared the conviction of most social gospelers that cooperatives were obviously the progressive Christian solution. The greatest social gospeler, Walter Rauschenbusch, believed that a combination of state and cooperative ownership would create a good society. Archbishop of Canterbury William Temple developed a type of guild socialism featuring a Meidner-like plan for worker-controlled collective capital funds. Reinhold Niebuhr stood for radical state Socialism before opting for the welfare state. Many liberationists and social ethicists have promoted "socialism" without describing what it is.

Most of this tradition wrongly operated with unitary ideas of capitalism and socialism, as though each were only one thing, culminating in the liberationist tendency to condemn "capitalism" categorically while employing "socialism" as a magic wand. The latter approach is too vague, monolithic, and evasive, but neither should social justice movements embrace any particular model as the next sign of the divine commonwealth.

The Better Way: Organic, Pluralistic, Pragmatic, Voluntary

Economic democracy must be a project built from the ground up, piece by piece, opening new choices, creating more democracy, building an economic order that allows for social contracts, common goods, and ecological flourishing. Economic democracy nurtures and sustains social trust: social capital that no healthy society can do without. It is a project that breaks from the universalizing logic of state socialism and takes seriously that there are different kinds of capitalism. Social theorist Roberto M. Unger calls for "alternative pluralisms," step-by-step constructions of alternative political and economic institutions. Abstract concepts of a monolithic "capitalism" or "market" obscure the variety of possibilities within existing capitalism and markets. So-called "capitalism" is always the product of particular historical configurations, contingencies, and struggles.

The tests of any experiment in economic democracy are pragmatic. To impose something like the Mondragon network on a capitalist society would require coercion over workers who don't want to belong to cooperatives. The U.S. Pacific Northwest has a network of longstanding, highly successful plywood cooperatives. Some plywood workers choose to work in conventional firms instead of the cooperatives. No political economy worth building would force them into a different choice.

The issue of choice, however, is the key to a better alternative. A politics that expanded the cooperative and social ownership sectors would give workers important new choices. The central conceit of neoclassical economics could be turned into a reality if meaningful choices were created. The neoclassical conceit is that capitalism doesn't exploit anyone, because labor employs capital as much as capital employs labor. But in the real world the owners of capital nearly always organize the factors of production. To expand the cooperative and other social market sectors would give choices to workers that neoclassical theory promises, but does not deliver. It would show that there is an alternative to a system that stokes and celebrates greed and consumption to the point of self-destruction.

The earth's ecosystem cannot sustain a U.S.-level lifestyle for more than one-sixth of the world's population. The economy is physical. There are limits to economic growth. Global warming is melting the Arctic ice cap at a shocking pace. It is melting large areas of permafrost in Alaska, Canada, and Siberia, and destroying wetlands and forests around the world. The manic logic of corporate capitalism pays little heed to communities and the environment, and none to equality. Corporate giants like ExxonMobil succeed as businesses and investments while treating the destructive aspects of their behavior as someone else's problem.

For thirty years one had to be a stubborn type to sail against the religion of the market. Now one only needs to be awake. If the stubborn types can seize this terrible moment as an opportunity to build a better social order, we may actually do it.

Gary Dorrien is the Reinhold Niebuhr Professor of Social Ethics at Union Theological Seminary and Professor of Religion at Columbia University. An Episcopal priest and author of thirteen books, including a trilogy on liberal theology, he has a long history of involvement in anti-imperialist and racial justice organizations.

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